Houston company's $750 million feeds trend for fuel storage

Published 6:00 pm, Saturday, January 8, 2011

A Houston company's $750 million purchase of a natural gas facility in Mississippi is just the latest in a string of publicly traded companies gobbling up privately held storage assets.

PAA Natural Gas Storage - a subsidiary of Houston-based Plains All American Pipeline - said Wednesday it will purchase the Southern Pines Energy Center, a salt cavern in Greene County, Miss., that can store up to 40 billion cubic feet of natural gas.

The purchase of the storage hub from privately held SGR Holdings - also of Houston - will increase PAA's storage capacity by 80 percent, give it access to eight major interstate gas pipelines and connections into rapidly growing markets in the Southeast and mid-Atlantic.

"We expect these assets to provide predictable, stable cash flows, even during challenging market conditions," Greg Armstrong, chairman and CEO of PAA, said in a statement.

PAA's purchase follows a number of similar trans- actions this year that saw natural gas storage assets go from privately held developers to publicly traded companies, particularly tax-advantaged master limited partnerships.

In September Kansas City, Mo.-based Inergy Midstream acquired the Tres Palacios Gas Storage facility in Matagorda County for $725 million. The publicly traded firm bought the 38.4 bcf facility from NGS Energy, a private company created by Centaurus, the energy hedge fund owned and run by noted gas trader John Arnold.

And earlier in the year, Niska Gas Storage Partners went public with a $359 million initial public offering, as did PAA in a $252 million IPO in April.

Shale formations

The deals reflect a maturing of the natural gas storage market as U.S. gas production continues to surge, thanks to prolific shale formations that have become more financially viable for exploration and production companies.

"Investors are realizing that the proliferation of natural gas supplies means there must be more infrastructure to process, ship and store gas," said a principal with a Houston energy firm familiar with such transactions.

Master limited partnerships like PAA have low costs of capital - meaning they can borrow money for far less than other firms - and are not taxed on the equity distributions they pay to shareholders.

"So it is only natural for these assets to settle into firms with low cost of capital," the executive said.

The purchases are also a way for the private firms - which began developing the properties several years ago when costs were lower but the future of gas production less certain - to cash out on their investments, said Darren Horowitz, vice president of energy equity research for Raymond James.

"They incubated those assets, extracted significant cash flow from them and are looking to monetize them," Horowitz said.

Tax code changes?

Another possible driver for private firms selling their storage assets in 2010 may have been the looming threat of changes in the tax code.

There's a chance, Horowitz said, that new legislation could change how general partnerships like those at the core of many private firms that developed gas storage facilities are taxed, a shift from being taxed on capital gains versus ordinary income.

By selling those assets now at what may be the peak of their value, private owners may be saving themselves a bigger tax hit with a sale next year or beyond.

While the assets are not being acquired on the cheap, there's still a lot of value that can be squeezed from them when they become part of larger networks of natural gas processing and transport companies, Horowitz said.

"Southern Pines was a bit expensive for Plains upfront, but it will come down to Plains effectively integrating it and expanding it in the future that will create more value," Horowitz said.